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Bleak update expected from Westpac

skyscaper buildings in city centre

Westpac (AU: WBC) is scheduled to deliver its first quarter trading update on Thursday 3 February.

In November, Westpac reported cash earnings for 2020-21 of $5.35bn, just below expectations but more than twice last year's result after the release of funds set aside for pandemic losses, and announced a $3.5bn share buyback. Westpac CEO Peter King said at the time that competition was likely to put further pressure on margins.

In the lead-up to Thursday's update, Citi's Brendan Sproules said in a note to clients: "We are expecting a relatively bleak update, forecasting core profit to decline by about 9% versus the 2H21 quarterly average and consensus of minus 5%, albeit ameliorated by a lower quality bad & doubtful debts beat."

"However, we would contend that expectations from both the buy and sell-side have reached a bottom."

Westpac shares underperformed other major banks by about 7% over the past three months, while cash profit expectations "appear to have bottomed" at about $1.4bn for the quarter.

"While we are not expecting a meaningful improvement in fundamentals in 2022, we do expect an improvement in expectations management, which would see the stock screening cheap at 1x book in an inflationary environment," Sproules said in a note to clients.

JPMorgan analysts peg Westpac’s outlook as “highly uncertain, with weak customer franchise metrics and revenue under pressure driven by compression on mortgage margins”.

“Westpac’s FY24 cost plan ($8bn target ex Specialist) is highly ambitious given it requires an approximate 20% reduction from the FY21 cost base, but we expect the market to remain sceptical on achieving this,” the broker said in a note to clients.

The broker estimates Westpac’s net interest income to decrease by around 4% in FY22 to $16.1bn. It expects the bank won’t make a recovery to FY21 levels until 2024.

The S&P/ASX 200 was up 1.2% on Wednesday, to close at 7,087.70.

The Australian dollar is trading at US71.35c.

Bitcoin is trading at $US38,332.

Gold is at $US1797.75 an ounce.

WTI crude oil is at $US88.89 a barrel.

Brent crude oil is at $US90.18 a barrel.

Capital Economics is pitching New Zealand’s record low jobless rate of 3.2% in the December quarter as the tightest in history. NZ also reported wage inflation of 0.7% quarter-on-quarter, based on the private sector labour cost index. On an annual reading, wage growth is at 2.8%, up from 2.5%, the highest since 2009.

Economist Ben Udy is forecasting that the Reserve Bank of New Zealand will raise interest rates “aggressively” to 2% by August from 0.75%. In the second half, unemployment will begin to worsen and Capital projects a jobless rate of 4.5% by the end of 2023.

Australia’s central bank chief Philip Lowe signalled for the first time that interest rates could rise this year if faster wages growth returns inflation sustainably to the 2-3% target.

That is “a plausible scenario” depending on how events unfold, but there are plenty of other scenarios as well, Lowe said in comments that increased his room for manoeuvre over the coming months, Bloomberg reported. In response to a question after a speech in Sydney on Wednesday, Lowe said: “There are a lot of uncertainties both on the supply side and the labour market dynamics and because inflation’s not that high at the moment we can wait to see how those uncertainties resolve.”

China is celebrating Lunar New Year holiday this week. Markets there are closed for the five-day event.

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